Mark Mobius: India’s inability to pass ease of doing business reforms a big risk
Singapore: India will have to cut down on bureaucracy, make things a lot more efficient, and easier for entrepreneurs to open their own businesses, as well as free up foreign investment, if it wants to address the critical issue of creating more jobs, said Mark Mobius, executive chairman, Templeton Emerging Markets Group, Franklin Templeton Investments.
In an interview, Mobius said the failure to create jobs is a big risk to the future of several countries, including India.
“And these governments, if they don’t react and begin to find ways to create jobs, they are going to be in trouble,” he warned.
As an investor, are you happy with the reforms process under the Narendra Modi government in the past three years?
We would like to see a lot more, but I think what has been done so far has been a giant step for India, particularly when you consider the kind of support Modi has gotten. We never expected that one guy would be able to get that much support at the local level—that’s never happened in the past 25 years—and it gives him a mandate to really move forward. But it is very similar to the situation with any of these countries—Brazil or any other country with populist sentiments. If you want to get re-elected, you have got to feed the population, which means hand-outs, etc. But if you can do that while minimizing corruption, then you’ve got a home run—this is why the identity card programme is so important, and if they can keep on rolling that out despite all the difficulties they have, that would put money in the hands of people more directly and at a faster rate.
We’ve seen loads of news of job losses in India’s information technology (IT) industry. Does India’s IT sector have what it takes to reinvent itself and remain relevant—can they innovate and continue to be remain competitive?
Yes—definitely! I think it is interesting if you look at a company like Tata, or any of big ones—they have very much anticipated what was coming. They knew that they couldn’t continue a model where you hire a thousand Indian engineering graduates and push through programs with clients overseas without any fallback on to another model—they saw that coming.
And, as a result, what they have been doing is building up domestic operations in each of these countries. So, if you take the US, I mean, I think they saw the fact that they were not going to be able to continue shipping Indian engineers there, and that they would have to use local people and they have been working on that. If you notice, the stock prices of these companies, there was a fallback and now it’s beginning to recover, because they are beginning to grasp this new model, and probably successfully, because they are pretty smart individuals running these companies.
Big picture—is India creating jobs fast enough. If the answer is no, how big a concern is this?
I think it’s a big risk. And by the way, not only in India, but in countries around the world, because young people now have cell phones, they know what is going on, they are much more vocal, they are able to organize themselves, and you are getting quite a lot of frustration on the part of these people that have good education and can’t find a job. So this is a big challenge for the government. And these governments, if they don’t react and begin to find ways to create jobs, they are going to be in trouble. There is going to be a lot of social unrest. So in the case of India, you know what has to be done—they have to cut down on the bureaucracy, they have to make things a lot more efficient, they have got to make it easy for these entrepreneurs to open up their own businesses. I mean I’m talking about really easy—like in a day you can set up a company, without having to go through all the problems they have now. And I think in addition, they are going to have to free up foreign investment. Foreign direct investment in India is much too low. It has to be speeded up because that will create jobs. If you take for example our own company, we have I think about 3,000 people in Hyderabad doing back-office work. Why Hyderabad? Because they make it easy—they give us the land, and we have tax breaks, etc. This has to be done throughout the whole country. This will increase the ease of doing business—for foreigners as well as locals.
As an investor, when you look at India, what are the risks? Is it interest rates going up, or government opting for more populist policies as it approaches general election, or is it tensions with Pakistan?
The big risk is the inability of Modi and his party to push through the reforms which would make it much easier for business to operate. The value-added tax was a giant step in the right direction, but you got to do more. You have to make sure that at each state level there is reform that will encourage investment—both domestic investment and foreign investment.
I think the Pakistan risk is not significant. As you know the Chinese are doing more in Pakistan, and that’s good because they will create jobs, and they will create industry and investment, as a result of the infrastructure they are building. And that will relieve tensions that you normally would have in Pakistan. And I think going forward also, it will be interesting to see what Trump does with trade in India—what kind of an agreement they will come to. That will be critical. Because Indians have a chance to increase exports to the US.
Considering Moody’s downgrade (of China’s rating) and looking at other emerging markets (EM) such as Brazil and South Africa and the issues they are confronted with, does this make India a default bright spot among all EM gloom?
India may be downgraded, too. We can never tell. Now we’re going to talk about equities. You know because fixed income is a different story. So, when you talk about equities, downgrades have no real impact because you’re going from A+ to A1, you know. You’re still in a very strong investment category. So I would say, and if you look at the behaviour of the market, there’s been no real impact of that downgrade. Now, if it went down to sub-investment grade, probably people would sit up and take notice. But otherwise, the equity market really has a behaviour of its own—they discount a lot of that stuff.
Speaking of equity markets, how do you see EMs overall without looking at any specific country?
Well, if you look at what the index has done, the recovery has been tremendous. And the recovery started at the beginning of last year. And before that, we had three years of underperformance. So, what happened is that a lot of the investors were underinvested, and they were underweight. And even now, I would say most investors are underweight in EMs. EMs represent 30% of market capital. So I think there is a long way to go. Particularly if you look at the difference in valuations, between EMs and developed countries, emerging markets are still cheaper and growing at a faster rate. We are looking at an average growth of 4% this year for EMs, which is really, really very good.
India’s equity market—is it more just a one-trick pony largely driven by consumption?
I think that is the future for India. The future is going to be consumption-led stocks, which is why everyone wants to get into that space. But I would not overlook other sectors. I know pharmaceuticals have had a difficult time recently. They may continue to have a difficult time for a year or so; but I think we have to keep an eye on that space. And I think we have to keep an eye on the outsourcing business. That is not going away. That is going to continue to grow. And these will become truly global companies. So there is a lot of interesting things happening. Everybody is rushing into the consumers, and it is very interesting and, yeah, challenging but the other sectors deserve a look.
Indian markets are at an all-time high. How long do you see the run continue and when do you see a sort of correction happening?
I think the Indian market has broken out, so to speak. It’s past previous highs in dollar terms. And when you see that kind of behaviour, then you can expect more of the same. I think the bull market will continue, particularly if the reform programme moves ahead, and particularly if more companies are privatized. They are talking about government privatization, which means more stock coming in. A lot of this stuff is very much related to the index because you know free float is the measure. As the free float in India increases, their weighting goes up. So, right now, the India weighting is much lower than we think it should be going forward, you know. So, that is going to have a big impact.
Sticking to India, when do you see corporate earnings coming back?
I think the problem we’ve had in the past few years was bank finance. As you know, the banks were a little bit on the edge, and they had too many bad loans, and they were in trouble in that sense, and so they were reluctant to give money to the private sector. Now the banks are steadier and working out these bad loans. Then I think you will see more activity. Their loan growth will resume and that will be good for the private sector. But I must say they have to be very careful about interest rates. Because if interest rates go up too far too fast, they will not be good for industry. So that is something we have to watch.
The last time we spoke a couple of months ago, you were bullish on telecoms, and you mentioned the possibilities of an entire new digital ecosystem being created by the entry of Reliance Jio Infocomm Ltd. How do you see this space?
They’ve still got a long way to go. If you consider Internet usage in China, compared with India, they still have a long way to go. Reliance’s successful roll-out demonstrates to other players that they’ve got to move as well. So, that will bring the Internet to many more people at faster speeds—that’s what it’s all about. You have got to increase the speeds and make it more accessible. In other words, widen the scope. Data is a real game changer. It is going to be very, very interesting to see this space going forward. But already you are seeing a big Internet business being developed in India—no one imagined Internet sales would take off in India the way it has. Look at the logistics, and you would think there’s no way that they could do it—but Indian firms have done it. It’s quite exciting. New business models are coming up that will be extended to other industries. For example, insurance—there will be a possibility of people getting insurance instantly on phones.
What about fintech—how disruptive will it be to India’s big banks?
Well, that’s the reason why we like the smaller private banks as we think they are more innovative. They are more capable of innovating in fintech. But the large banks are not sitting on their hands either because they realize that they are going to be left behind. In terms of branches, in some countries, it makes a heck of a lot of sense not to have them—where the transportation is very efficient—very easy to communicate and you don’t need a branch.
In India, you still need a branch to work because the personal relationship is so important. Once people get used to digital, things will move very quickly...